The beginning of the big carbon age?

The voluntary carbon trading market has failed to meaningfully develop but that could change due to the finalisation of Article 6 of the Paris Agreement according to a report from Credit Suisse – Treeprint: Carbon Markets, The Beginning of the Big Carbon Age.

In the report, Credit Suisse said that prices in the top three most liquid carbon markets doubled on average in 2021, but they are still too low to incentivise tangible decarbonisation activities. David Bleustein, global head of securities research at Credit Suisse, said in the report: “Growth of big carbon markets is still in the early stages, and we view carbon markets as an emerging asset class that could potentially rival the global oil market in size.”

More than 60 compliance carbon markets, i.e., market- driven emission trading systems (ETS), and taxes have been implemented globally covering 22% of greenhouse gas emissions. Global compliance carbon markets, in which carbon allowances are traded and regulated by mandatory national/sub- national regimes, account for 75% of carbon schemes and have an aggregate market value of $270bn.

Credit Suisse believes this figure could reach more than $1 trillion due to higher carbon prices and the expansion of emissions coverage, while trading value could be multiples of that driven by improved accessibility and liquidity.

The report said Article 6 of the Paris Agreement paves the way for credible carbon offset markets by creating a common rulebook for what can qualify as a carbon credit and how it can be used for different purposes. “Enhanced credibility in the voluntary carbon markets could enable them to grow substantially from the current $1bn to between $50bn and $100bn by 2030,” added Credit Suisse.

The report highlighted that exchanges are increasing environmental offerings with ICE and the European Energy Exchange (EEX) as the two largest platforms for trading carbon compliance credits with carbon offset futures also seeing significant growth. Futures are also increasingly supporting a new breed of carbon allowance ETFs such as the KarneShares Global Carbon ETF, with a current market value of $1.7bn. The ETF mirrors the performance of IHS Markit’s Global Carbon Index and doubled in 2021.

“Clear steps forward on global climate actions combined with improvements in market size, accessibility, and liquidity are creating an environment that we believe is ripe for the emergence of big carbon markets,” added Credit Suisse. “This is concurrent with growing interest from the investment community to not only properly price carbon risks in their investment portfolios but also enhance their risk-adjusted returns.”

@Markets Media Europe 2022

 

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